R. Glenn Hubbard, dean of Columbia University’s Graduate School of Business, recommends a course of action of presidential candidates, Congress and regulators in an outstanding Washington Post column today, “What the Candidates Can Do.”
First, it is clear that openness to foreign investment in U.S. firms and economic opportunity for financial services outside the United States will help to resolve many financial institutions’ problems. Second, rebuilding the internal net worth and capital of major financial institutions is essential to relieving credit stresses. Taxes on savings — including dividend, capital gains and corporate taxes — are at least partly capitalized in the value of existing assets. Raising capital taxes — undesirable economic policy at any time — would also raise macroeconomic concerns for righting Wall Street‘s ship. Clarity about the extension of the 2001 and 2003 tax cuts, which bolster collateral values, along with a corporate tax cut, would yield a potent tonic. Third, the financial meltdown that engulfed Lehman and AIG, and policymakers’ uncomfortable responses to it the past several months, clearly highlight the need for regulatory reform.
A good prescription (and consistent with the priorities NAM Executive Vice President Jay Timmons laid out in a Shopfloor post yesterday.)
Hubbard, the former chairman of the President’s Council of Economic Advisors, also makes a point about the next stage of regulation, in the process deflating some of the populist rhetoric that seems popular:
We need regulatory reform, but the problem is actually not too little regulation — both lightly and heavily regulated institutions are in trouble. We must put in place smarter regulation. Regulation itself is not blameless in the growth of high-risk mortgage lending. A key step would be to broaden capital and liquidity requirements and increase them during financial booms to push back against excessive risk taking.
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